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Marvell Technology's (NASDAQ:MRVL) Q2 Sales Top Estimates, Next Quarter Growth Looks Optimistic


Full Report / November 02, 2021
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Networking chips designer Marvell Technology (NASDAQ: MRVL) reported results in line with analyst expectations in Q2 FY2022 quarter, with revenue up 47.9% year on year to $1.07 billion. The company expects that next quarter's revenue would be around $1.14 billion, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Marvell Technology made a GAAP loss of $276.4 million, down on its loss of $157.8 million, in the same quarter last year.

Marvell Technology (MRVL) Q2 FY2022 Highlights:

  • Revenue: $1.07 billion vs analyst estimates of $1.06 billion (0.93% beat)
  • EPS (non-GAAP): $0.34 vs analyst estimates of $0.31 (8.45% beat)
  • Revenue guidance for Q3 2022 is $1.14 billion at the midpoint, above analyst estimates of $1.13 billion
  • Free cash flow of $189.8 million, up from negative free cash flow of $35.18 million in previous quarter
  • Inventory Days Outstanding: 59, down from 118 previous quarter
  • Gross Margin (GAAP): 34.5%, down from 49.3% same quarter last year

Moving away from a low margin storage device management chips in one of the biggest semiconductor business model pivots of the past decade, Marvell Technology (NASDAQ: MRVL) is a fabless designer of special purpose data processing and networking chips used by data centers, communications carriers, enterprises, and autos.

Marvell was founded in 1995 by Dr. Sehat Sutardja, his wife, and his brother, and for the first two decades was focused on chips used to run storage devices like disk drives and networking equipment like ethernet switches. It also supplied Wi-Fi chipsets used in mobile devices like the iPhone and Google’s Chromecast. In 2016, in the wake of an internal accounting investigation activist investor Starboard Value acquired a minority stake and ousted Dr. Sutardja and his wife, installing Matt Murphy as CEO.

Murphy quickly exited low margin businesses like the consumer hard drives and Wi-Fi chips and refocused R&D efforts to focus on the higher margin networking business. He made multiple transformative acquisitions: Cavium in 2018, Avera and Aquantia in 2019, and Inphi and Innovium in 2021. The result is a company with leading chipsets that enable data transfer – within and between datacenters, across 5G cellular networks, and throughout autos.

The chips used to power today’s cloud data centers are no longer just general purpose CPUs like we think of that run a PC, but there is also a range of chips that are customized for specific tasks like AI used to scan online videos or machine learning used to make ecommerce recommendations. Marvell specializes in these types of chipsets, known as customized ASICs. Marvell also increasingly competes with chip heavyweights Intel and Nvidia with its Octeon data processing units or “DPUs” which is an ARM-based CPU that offloads networking, storage, security, and other infrastructure workloads from the CPU in the server and accelerates them, saving CPU capacity for other tasks, like running applications.

Marvell’s peers and competitors include AMD (NASDAQ:AMD), Broadcom (NASDAQ:AVGO), Intel (NASDAQ:INTC), and Nvidia (NASDAQ: NDVA).

Analog Semiconductors

Longer manufacturing duration allows analog chip makers to generate greater efficiencies, leading to structurally higher gross margins than their fabless digital peers. The downside of vertical integration is that cyclicality can be more pronounced for analog chipmakers, as capacity utilization upsides work in reverse during down periods. Read More The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. By comparison, analog chips regulate real world signals, such as temperature, speed, sound, or electrical current, converting them into a stream of digital data that can be processed by digital semiconductors. Analog semiconductors are also used to manage power in any electronic device; they convert, store and distribute the electrical energy that comes from a battery or wall plug. Analog chips are found everywhere from household appliances like refrigerators or washing machines, to smartphones, cars and factory production lines.

Sales Growth

Marvell Technology's revenue growth over the last three years has been solid, averaging 12.4% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $727.2 million to $1.07 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Marvell Technology Total Revenue

This was a great quarter for Marvell Technology with 47.9% revenue growth, beating analyst estimates by 0.93%. This marks 6 straight quarters of revenue growth, implying we are mid-cycle for Marvell Technology, as a typical upcycle tends to last 8-10 quarters.

Marvell Technology believes the growth is set to accelerate, and is guiding for revenue to grow 57.4% YoY next quarter, and Wall St analysts are estimating growth 39.1% over the next twelve months.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Marvell Technology Inventory Days Outstanding

This quarter, Marvell Technology’s inventory days came in at 59, 18 days below the five year average, showing no indication of an excessive inventory buildup at the moment.

Pricing Power

Marvell Technology's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 34.5% in Q2, down 14.8 percentage points year on year.

Marvell Technology Gross Margin (GAAP)

Despite declining over the past year, Marvell Technology still retains industry average gross margins, averaging 47%, pointing to a good competitive offering, decent cost controls, and only modest pricing pressure.

Profitability

Marvell Technology reported an operating margin of -23.2% in Q2, down 19 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.

Marvell Technology Adjusted Operating Margin

Operating margins have been trending down over the last year, averaging -4.79%. Not a great indicator for Marvell Technology, whose operating margins are amongst the lowest for semiconductors.

Earnings, Cash & Competitive Moat

Analysts covering the company are expecting earnings per share to grow 39.6% over the next twelve months, although estimates are likely to change post earnings.

Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Marvell Technology's free cash flow came in at $189.8 million in Q2, down 8.84% year on year.

Marvell Technology Free Cash Flow

Marvell Technology has generated $516.6 million in free cash flow over the last twelve months. This is a solid result, which translates to 15.1% of revenue. That's above average for semiconductor companies, and should put Marvell Technology in a relatively strong position to invest in future growth.

Over the last 5 years Marvell Technology has reported an average return on invested capital (ROIC) of just 5.14%. This suggests it may struggle to find compelling reinvestment opportunities within the business.

Key Takeaways from Marvell Technology's Q2 Results

Sporting a market capitalization of $56.7 billion, more than $559.6 million in cash and with positive free cash flow over the last twelve months, we're confident that Marvell Technology has the resources it needs to pursue a high growth business strategy.

We were impressed by how strongly Marvell Technology outperformed analysts’ earnings expectations this quarter. And we were also glad to see the inventory levels go down. On the other hand, it was less good to see the pretty significant deterioration in gross margin. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company currently trades at $68.75 per share.

Is Now The Time?

Marvell Technology may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We cheer for everyone who is making the lives of others easier through technology, but in the case of Marvell Technology we will be cheering from the sidelines. Its revenue growth has been weaker, but at least that growth rate is expected to increase in the short term. And while its solid free cash flow generation gives it re-investment options, the downside is that its operating margins reveal subpar cost controls compared to other semiconductor businesses and its its relatively low return on invested capital suggests suboptimal growth prospects.

Given its price to earnings ratio based on the next twelve months is 42.4x, Marvell Technology is priced with expectations of a long-term growth, and there's no doubt it is a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

The Wall St analysts covering the company had a one year price target of $64.6 per share right before these results, implying that they didn't see much short-term potential in the Marvell Technology.

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